Mortgage Market Monitor October 2017

Monthly Commentary

Market Update

Following a busy summer in which secondary supply remained relatively steady and elevated, the start of the third quarter saw heightened activity
carry over as heavy selling pushed aggregate bid list volume to the highest monthly level in the past two years. October’s calendar filled up right from
the beginning as a GSE seller announced a 615mm list during the first week. From there, the GSEs would follow up with two more lists that amounted
to 1.3bn. Similarly, other recurrent legacy sellers liquidating their portfolios were also significant sources of supply throughout the month and
contributed over 2.8bn. Altogether, volume for October reached close to 9.4bn with Trace reporting 20.6bn in trading. Demand was more than enough
to digest the surge in selling as dealers and end accounts alike were aggressively bidding on bonds throughout the capital structure. Just as stock
market indices reached higher highs and volatility indices settled into new lows, Non-Agency spreads followed a familiar path of pushing past postcrisis
tights with the credit curve continuing to flatten as investors searched for yield.

October received good news on the settlement front where trustees for deals covered under the 4.5bn JP Morgan settlement received the required IRS
rulings on REMIC status. The next step is for the trustees to obtain each trust’s allocation from an expert, though there could be further delays until
ultimate payment if trustees seek judicial instruction regarding the cash flow waterfall. Meanwhile in the primary market, Freddie Mac issued its sixth
transaction of the year, 600mm STACR 2017-HQA3. Similar to STACR 2017-DNA3 issued in September, Freddie excluded from the reference pool all
loans in counties that were designated as FEMA disaster areas in the aftermath of Hurricanes Harvey and Irma. The deal was upsized and priced
tighter than guidance – M1 at 55dm, M2 at 235dm, and B1 at 445dm.

Collateral Performance

Serious delinquencies increased slightly across all sectors in October. Prime increased by 2 basis point to 5.81%; Alt-A delinquencies increased by 4
basis points to 12.81%; Option Arm delinquencies increased by 5 basis points to 19.59% and Subprime delinquencies increased by 21 basis points to
24.33%. Roll rates from current status to delinquency continue to be held in at very low levels.

Case-Shiller futures indicate a continuation of slow gains in residential home prices, predicting home prices will rise two to three percent annually
during the next three years. Year-over-year, home prices are up 5.9% across Case-Shiller’s 20 major city index. At the national level, changes in
severities were mixed across all sectors. At the state level, California Subprime severities were higher at 52% this month. Florida Subprime severities
increased to 72%. New York Subprime severities increased to 90%; and Nevada Subprime severities increased to 73%.